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I’ve been reading a lot more Morgan Stanley research this year because their strategists have been the most accurate forecasters for global equity markets. In a recent report, the company’s U.K.-based cross-asset strategist Andrew Sheets reiterated a market prediction that also included a vital lesson about investing: “Global growth continues to decelerate, [developed world] inflation keeps rising, financial conditions carry on tightening and trade tensions carry on escalating. All these present a challenging backdrop, even before we consider poor seasonality for August/September. The level of growth/inflation/policy may be OK, but the direction of travel remains problematic.”

Practically, the first sentence is a restatement of Mr. Sheets’ (accurate so far) early-year production that global manufacturing activity and general economic growth would peak and then decelerate during this year. It is the last sentence, noting that while global growth levels are fine but ‘the direction of travel remains problematic,’ that contains the lasting investment lesson.

In investing, outperformance is often generated not by owning assets with the highest growth rates – the stronger growth is likely already reflected in the price – but in finding situations where the growth rate is about to change.

Consider a hypothetical stock with a strong and consistent 20 per cent annual profit growth rate. The price of this stock is unlikely to change if the quarterly earnings report shows growth close to 20 per cent – that’s already priced in. It would take profit growth well above 20 per cent, and hints that the higher level will be maintained, to see the stock price jump. Conversely, our fictional stock would get hammered on a report on 12 per cent earnings growth.

In the current environment, the rate of global manufacturing growth remains healthy, but it’s slowing. As this chart implies, the deterioration in activity is dragging industrial metals prices lower with it.

The weakness in commodity prices underscores the importance of Mr. Sheets’ ‘direction of travel’ – also known as change in the rate of change, or second derivative of growth - in determining asset prices.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

The Hydropothecary Corp. (HEXO-T), a Quebec-based licensed marijuana producer, is undergoing tremendous growth as it prepares for the legalization of recreational marijuana this fall. The company also recently announced a joint venture agreement with beer giant Molson Coors Canada. Management believes the company has a competitive cost advantage given it has greenhouse facilities and electricity rates in Quebec are low compared to its industry peers with operations located in Ontario. There are seven analysts who cover this small-cap marijuana stock with a market capitalization of $931-million and all seven analysts have buy recommendations. Robust growth is anticipated over the upcoming years. Jennifer Dowty explains (for subscribers).

Interfor Corporation (IFP-T), one of the largest North American lumber producers, saw its share price rally over the past two weeks. Analysts anticipate this company’s stock price may rise 33 per cent over the next year. Earlier this month, the analyst at TD Securities upgraded the stock to an “action list buy” recommendation, while the analyst from Raymond James added the stock to the firm’s current favourites list. The company reported better-than-expected second quarter financial results. According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 4.7 times the 2019 earnings forecast. This is at the low end of the historical trading range. Jennifer Dowty reports on this Vancouver-based company (for subscribers).

Stingray Digital Group Inc. investors are hoping the results of its latest acquisition spree will jazz up the music and video provider’s stock price. Shares of Montreal-based Stingray, best known in Canada for its commercial-free streaming service Stingray Music, have fallen by about 25 per cent since hitting their all-time high of $11.05 in late April. Six out of seven analysts who cover the company have a “buy” recommendation and one has a “hold,” with a 12-month consensus target price of $11.50.“Stingray is one of the most underrated media successes in Canada, in my view,” GMP Securities analyst Deepak Kaushal, who has a “buy” rating and $14.50 target on the stock, said in an e-mail. Brenda Bouw reports (for subscribers)

The Rundown

Two dividend stocks bucking the shrinking portfolio trend

These are not good times for income-oriented investors. Rising interest rates have put downward pressure on many high-yielding stocks, reducing the market value of their portfolios. The dividends are still being paid. But people are getting edgy as they see the price of their shares pull back. No one likes a shrinking portfolio. Gordon Pape recommends a few dividend stocks that are bucking the trend (for subscribers).

Three Canadian banks poised to hike dividends this earnings season

Concerns about the Canadian housing market have been weighing on bank stocks this year, and it’s likely that these concerns will be a focal point for investors as the big banks roll out their fiscal third-quarter results starting this week, David Berman reports. Royal Bank of Canada will kick things off on Wednesday morning, followed by Canadian Imperial Bank of Commerce on Thursday. Next week, Bank of Montreal, Bank of Nova Scotia and National Bank of Canada will report their respective results, with Toronto-Dominion Bank closing the reporting season on Aug. 30. The outlook is upbeat, even as Canadian personal-debt levels have climbed to record highs and regulators have introduced new rules to dampen the housing market (for subscribers).

Some disquieting conclusions for investors about global investment flows

The sheer volume of cross-border investment flows is threatening the independence and influence of central banks across the world. For Canadians who care about the value of the loonie, or the effects of interests rates on dividend and income stocks, the trend is of singular importance as the Bank of Canada tightens monetary policy. Citigroup’s Britain-based credit strategist Matt King was among the first analysts to grapple with the implications of increasing cross border asset flows. Scott Barlow interviewed Mr. King on the topic earlier this summer (for subscribers)

Why gold is losing its lustre

Nothing is going right for gold. Many of the factors that drove gold to a record high seven years ago, including a frightening environment for stocks, a precarious U.S. dollar and fears over runaway inflation have reversed course and are now working against it. Last week, gold futures slid to their lowest level in 18 months. Since peaking at just less than US$1,900 in late 2011, gold has lost 37 per cent of its value. Since April alone, it’s down by about 12 per cent. Much of the weakness is due to the strengthening U.S. dollar, a lack of investment demand, the loss of its appeal as a safe haven investment and the rise of alternative currencies such as bitcoin. But other intangibles are at work, reports Niall McGee. (for subscribers).

Zero-fee investing won’t make you a successful investor

Remember when the biggest obstacle to successful investing was high costs? “The investment business will always be fuelled by ego and greed, but today, there are more low-cost options than ever. In fact, if recent trends continue, it may soon be possible to build and maintain a portfolio for free,” writes Dan Bortolotti, an associate portfolio manager at PWL Capital in Toronto and creator of Canadian Couch Potato. He looks closer at the realities of a zero-fee universe. Hint: It won’t make you a successful investor.

Top Links (for subscribers)

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What’s up in the days ahead

David Berman looks at the contrarian case for gold and Rob Carrick tells us about some little-known fees at online brokerages.

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Compiled by Brenda Bouw

[BB1]Darcy to fill

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